246) Europe Debt Crisis Effect on Equity & Bond Funds

246) Europe Debt Crisis Effect on Equity & Bond Funds

Do you know what happened to the Stock Market and Bonds during the Europe Debt Crisis (EDC) from Jul to Sep 2011? 

Do you wonder what happened to the markets after the Crisis was over?

Let's look at the details to learn lessons from the past.

Below is an example of Equity fund and the benchmark KLCI performance during EDC.

The EDC crisis happened from 8 Jul to 26 Sep 2011 for only 80 days (around 2.5 months).
The Equity Fund dropped 22%, while KLCI also dropped 16%.

If you had invested $10,000 into the Equity Fund just before the crisis started and sold everything at the lowest point, you would have lost $2,200. 

Now, let's look at the graph below of same fund after the crisis was over.

After the EDC crisis, the stock market increased from 26 Sep 2011 to 29 Sep Sep 2014 for 1099 days (3 years). The same Equity Fund increased 41%, while KLCI increased 39%.

If you had invested $10,000 into the Equity Fund at the lowest point, you would have made a profit of  $4,100. 

Now, let's look at the graph below of combined total period from 8 Jul 2011 to 29 Sep 2014. It was the period of EDC start to end of the market growth.

The Equity fund dropped, rebound back and still gave 9% total returns, while KLCI gave 16%.

If you had invested $10,000 into the Equity Fund just before the crisis started and kept staying invested until the market recovered, you would still made $900. 

But, if you had invested another $10,000 at the bottom of the market, you would have a better return

The first $10,000 became 10,000 x (1 + 9%) = $10,900

The second $10,000 became 10,000 x (1 + 41%) = $14,100

The total $20,000 became $10,900 + $14,100 = $25,000

Now, let's compare the performance of a Bond Fund.

During the EDC crisis, the Bond Fund increased 2.2%, while the 12 Months Fixed Deposit value increased 0.7%. 

If you had invested $10,000 into the Bond Fund just before the crisis started and sold everything at the end of the crisis, you would have made $220. 

Click here for more reading on factors that affect bond prices.

https://highlevelrules.blogspot.com/2020/03/241-factors-affect-bond-prices.html

Now, let's look at the graph below of same fund after the EDC Crisis was over.

After the EDC crisis, the Bond Fund continues o give positive returns 12.2%, while the 12 Months Fixed Deposit value increased another 9.8%.

If you had invested $10,000 into the Bond Fund just when the crisis ended and sold everything at the end of the recovery, you would have made $1,220. 

Now, let's look at the graph below of combined total period from 8 Jul 2011 to 29 Sep 2014. It was the period of EDC start to end of the market growth.

The Bond Fund total increased 14.7%, while the 12 Months Fixed Deposit value increased 10.6%.

If you had invested $10,000 into the Bond Fund just before the crisis started and kept staying invested until the market recovered, you would made $1,470. 

But, if you had invested another $10,000 at the bottom of the market, you would have a better return

The first $10,000 became 10,000 x (1 + 2.2%) = $10,220

The second $10,000 became 10,000 x (1 + 14.7%) = $11,470

The total $20,000 became $10,900 + $14,100 = $21,690

Comparison:

1) During EDC Crisis, the Equity Fund dropped 22%, while the Bond Fund increased 2.2%.

2) After EDC Crisis, the Equity Fund increased 41%, while the Bond Fund increased only another 12%. The Equity Fund gave much higher returns than Bond Fund. An Investor who had invested at the lowest point of the crisis would have made a very good return.

3) During & after EDC Crisis, the Equity Fund increased 9%, while the Bond Fund increased 14%. An investor that had bought just before EDC, stay invested until the Crisis was over and continued to stay invested would still made a some returns.

4) The Bond Fund continued to increase in value with more stable performance while the Equity Fund was more volatile with bigger ups and downs.

Conclusion:

1) Stay Invested for the Long Term until your financial objective is achieved.
2) Understand that Equity Fund is more volatile, so stay calm.
3) Equity Fund has Higher Volatility (Risk) vs Bond Fund. However, higher Risk gives higher Returns in the long term.
4) Diversify your portfolio to balance the Risk and Returns.
5) Add more investment at the market low point.

For more related articles:

244) Global Financial Crisis Effect on Equity & Bond Funds

http://highlevelrules.blogspot.com/2020/03/244-global-financial-crisis-effect-on.html

242) SARS Crisis Effect on Equity & Bond Funds

https://highlevelrules.blogspot.com/2020/03/242-sars-crisis-effect-on-equity-bond.html

241) Factors Affect Bond Prices

https://highlevelrules.blogspot.com/2020/03/241-factors-affect-bond-prices.html

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